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How Does Equity Release Affect My State Pension?

Before we answer the important question ‘how does equity release affect my State Pension?, we need to first look at what equity release is, and what it brings to customers who are not satisfied with their State Pension or private pension.

Equity release is a fairly modern scheme that allows consumers to either take out a lifetime mortgage or have a home reversion plan.

Whichever type of equity release product the customer chooses to have, the idea is that they are taking money from their property to put to use in their retirement.

When a homeowner is successful in their equity release application, they will receive a loan that is made-up of tax-free cash, and they are able to spend this loan however they would like.

There is no obligation for them to repay the borrowed money, which makes equity release stand out from traditional schemes.

Instead, when the homeowner enters permanent care or passes away, the equity release provider will sell their home and take enough funds from the sale to cover the amount of borrowed money.

Similar to a State Pension, equity release is primarily targeted at people in retirement. However, people as young as 55 years old can get started with equity release, and it is not a requirement to be retired, so this scheme is not reserved for people who are no longer working.

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Who is Eligible For Equity Release?

As we have outlined, you can be eligible for equity release whether you are working or retired. You do have to be at least 55 years old, and sometimes there is also an upper limit of age, but many lenders will accept equity release consumers of all ages above 55.

It is essential that all equity release consumers are homeowners whose property is worth at least £70,000. The property often has to be freehold, but it may be possible for you to get involved with equity release if you have a leasehold property.

What is a State Pension?

The State Pension is income support that is available to people above a certain age in the UK.

The amount of money you receive in your pension (pension rates), and the age that you will be able to access it, vary depending on when you were born and how long you have been paying National Insurance (NI) for.

If you are unsure when you will be able to access your State Pension and how much money will be available to you, try using a pension calculator (1).

This will help you to figure out whether your State Pension would cover your retirement costs, or whether you would need to supplement your income with something else.

Many people choose to contribute extra money to their pension, so they are left with a larger amount than the fixed amount offered by the government.

However, pension choices are personal, so there are also people who solely rely on the State Pension (sometimes with an additional State Pension) in retirement.

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Who is Eligible For a State Pension?

To receive a basic State Pension, you must have been paying National Insurance for 30 years in total. Alternatively, you must have been receiving National Insurance credits.

This may apply to people who were unemployed, people who were carers, or people who were too sick to work.

If none of this applies to you, you may still be entitled to some money, but it will be less than if you had National Insurance credits or had been paying National Insurance. You can expect that your basic weekly pension will be less than £141.85.

You may be able to make voluntary National Insurance contributions in order to receive a weekly State Pension (2). You could also be eligible to inherit your partner’s State Pension.

In terms of age, any men who were born before the 6th April 1951, and women who were born before the 6th April 1953, are eligible for the basic State Pension (3). This is the older version of the pension, but it applies to many people who are currently of the State Pension age.

The new State Pension is available to men born on or after the 6th April 1951 and women born on or after the 6th April 1953 who have 10 qualifying years on their National Insurance (4).

The State Pension rules changed for transgender people in recent history. Any transgender people born after the 4th April 2005 who have legally changed their gender will have access to pension credit payments from the state.

However, transgender people born between the 24th December 1919 and the 3rd April 1945 will have to contact the Gender Recognition team to find out whether their State Pension will be affected (5).

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What Happens If You Release Equity While You are Claiming a Private Pension?

Generally, nothing will happen to your private pension if you decide to take out equity from your property. This is because it is your money rather than the governments’, and you do not have to prove that your funds are below a certain amount in order to take out equity.

However, if you have plenty of money in your private pension, we would question why you wanted to release equity. Though everyone is entitled to take out equity regardless of their income, it would probably be better to rely on your private pension rather than getting into debt.

Does Equity Release Affect Your State Pension?

No, releasing equity does not reduce the amount of money you will receive via a State Pension. You can safely rely on both sources of income in retirement.

However, if you put your equity loan into savings, it is possible that it would remove your eligibility for the State Pension. Your savings would have to exceed £10,000 for this to apply (6).

This is particularly something to consider if you are a younger equity release consumer, as your savings would build up overtime. However, if you released a large amount of money from your property, you may not need the State Pension anyway.

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Could I Rely On My Pension Instead Of Releasing Equity?

If you have enough money in your private pension and/or State Pension to last you throughout your retirement, you could most certainly rely on this income instead of releasing equity from your property.

Unfortunately, many pensioners are not in this position for various reasons.

Firstly, they may have gaps in their National Insurance payment history, whether it be because they took time off work for childcare, had to care for a family member, became ill, or experienced any other event that impacted on their fitness to work.

Secondly, many people did save enough for their retirement after seeking help from a financial adviser or using online calculators.

However, they did not anticipate that the cost of living would increase so much, and they have found that they need much more money for retirement than they planned for.

If this does not apply to you, we would encourage you to continue to rely on your pension as your main source of income for retirement.

Though repayments are not a necessary part of the equity release scheme, some of your money will be taken when you pass away.

For this reason, it is better to rely on your pension and allow more of your money to be passed on to your beneficiaries, provided that you have enough money to do this.

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Why Should I Consider Taking Out Equity For Retirement Instead Of Using My Pension?

Firstly, equity release is a reliable way of boosting your retirement income significantly. A recent study has found that homeowners with an average property value in the UK can increase their pension pot by 181% through equity release (7).

The study demonstrated that people aged 55 and over release an average of £111,511 through equity release. With an average life expectancy in the UK of 82, this would mean an annual increase of £4130 over 27 years.

With certain schemes, there is no guarantee that you will not re-enter poverty after getting help.

However, if you are able to release such a significant amount with equity release, you would be set for life. You would also be protected in the sense that you would have a home to live in for the rest of your life, so you would not have to worry about the potential for homelessness.

Secondly, when you receive an equity loan, the money is completely tax-free. Many people find that the equity release scheme is the most financially beneficial for them due to the fact that they do not have to pay tax on it.

On the other hand, you will have to pay tax on your pension. The first portion (often 25%) may be free of tax, but the rest will be taxed just like any other income (8).

Next, if you want to make any big purchases, it may be difficult to do this using just your pension.

You do not want to end up in the position where you spend a large chunk of your income on one thing, and you are left with a minimal amount of funds for your everyday living costs.

With equity release, you could take out an equity release lump sum lifetime mortgage to fund a one-off purchase.

You would never be left with a minimal amount of funds as you would not have to pay back the money. This is why equity release is a great solution for people who need access to money very quickly.

Finally, if you have gaps in your employment, you may not be eligible for the State Pension, or you may have to wait a while longer before you receive it.

However, with equity release, as long as you are at least 55 years old, you could begin to access your loan in a matter of eight weeks. This may be the best option for people who cannot afford to wait until their pension comes in.

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What Happens If I Do Not Have a Pension?

If you do not have a pension, without equity release, you might be stuck. However, fortunately, you do not have to have a solid income to be eligible for equity release.

This means that you could apply to receive an equity loan even if you don’t have a pension. The amount of money you currently have would not impact on your loan amount, as the most important factor is the value of your property.

It is also important to remember that you could start a pension right now. If you are still young enough to be working, you could open up a pension to help fund your retirement. It goes without saying that this would only be a small amount, but it would be better than having no pension at all.

As we mentioned above, you could also consider making voluntary National Insurance payments to become eligible for a State Pension.

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Can I Release Equity While I am Still Working If My Pension Isn’t Going to be Sufficient For Retirement?

Yes, you can most certainly release equity while you are still working, as long as you are at least 55 years old with a property worth at least £70,000.

Some people choose to do this as they want to access their loan as soon as possible, especially if they are looking to spend it on something that they will enjoy for the rest of their lives, such as a second home or a renovated home.

However, if your income from work and your pension are currently sufficient to fund your living, you may want to consider releasing equity when you are older.

This is because older equity release consumers are sometimes entitled to benefits such as high loan amounts and low interest rates.

If you took this route, we would advise you to speak to an equity release adviser first about which equity release lenders would be willing to offer loans to people in their 70s or 80s.

There are plenty of lenders who allow this in the UK, but not all of them do, so you would need to do your research before making this decision.

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Equity Release Vs State Pension – Which One is More Costly?

There are no costs involved with receiving a State Pension, as it is money that is available from the government to anyone who is above a certain age and who has made enough National Insurance contributions.

The only time that you would have to consider the costs of a State Pension is if you were choosing to make voluntary National Insurance payments as a way of qualifying for a State Pension.

On the other hand, there are fees involved with taking out equity, including legal advice, equity release advice, and administration. It should generally cost no more than £3000, but we know that this is a lot to a lot of people.

Remember that once you receive your loan, you will not have to pay any money back, so it may be worth it to take out equity regardless of the extra costs involved.

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Equity Release Vs State Pension – Which One is More Reliable?

There is no set answer as to whether equity release or a State Pension are more reliable.

On one hand, the State Pension can be very reliable for a lot of people, as it is a fixed weekly income that can be the difference between people entering poverty and having enough income to survive on a weekly basis.

What’s more, you will not get into debt by accessing a State Pension, as it is money that you are entitled to rather than money you are borrowing with a view to paying it back eventually.

Finally, anyone who has worked for a set amount of time will receive the State Pension, whereas you have to choose to get involved with equity release in order to benefit from it.

You can also receive a State Pension regardless of your living situation, whereas equity release requires you to be a homeowner and, preferably, one with a freehold property.

On the other hand, equity release can be more reliable in the sense that it provides homeowners with more money.

Rather than a minimal weekly income, you can release large amounts that could change your life. You can also choose to access this money all at once or gradually, which means you can adjust the scheme according to your spending habits and future plans.

It could be suggested that both schemes are as reliable as each other in that they both provide you with a steady income for the rest of your life, rather than helping you to bridge finance for a short amount of time.

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Equity Release Vs State Pension – Which One Has a Wider Eligibility Criteria?

The State Pension probably has a wider eligibility criterion as most people in the UK have at least the minimum requirement for National Insurance payments.

However, you do have to reach a certain age to be eligible for the State Pension, and this age is only increasing as each year passes.

By 2028, the general retirement age is expected to be 67 years (9). You cannot receive your State Pension before you reach State Pension age, so the rules for accessing money are stricter in this sense than they are for equity release.

Equity release could be deemed narrower in the way that it requires customers to own a property worth £70,000 pounds or more. However, it allows people as young as 55 to access a loan, whether they have huge employment gaps or not, and the same cannot be said for the State Pension.

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Equity Release Vs State Pension – Which One is Better For Funding Care Costs?

Everyone funds their personal care costs differently, so if you are unsure how you would like to cover your future costs of care, we would recommend speaking to a financial adviser to figure out which option would be best for you.

Equity release is a great way to fund care as you get access to a large amount of money. This means that if you have not been able to save up for your care, you could still access the same quality care as someone who has been saving for years.

What’s more, if you go into long term care while you are on an equity release scheme, you may be able to access some money from your property sale that can go directly towards your care.

On the other hand, if you are paying National Insurance in preparation for a State Pension, you are able to save up for your care home fees gradually without getting into debt.

This means more money would be available to your family when you pass away, as there would be no equity release lender looking to take money from your home sale.

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Equity Release Vs State Pension – Which One is Better For People Who are Still Working?

You can release equity and claim a State Pension while you are still working, regardless of the period of time you end up working for. This means that either option is great for people who want to continue to work.

Arguably, equity release is the better option for people who are still working because an equity loan is accessible from the age of 55.

If you lived to be 80 years old and you took out equity at 55 years old, you would be able to enjoy this scheme for a full 25 years.

What’s more, most people who are still working have not yet reached State Pension age, so it would not be a possibility for them to access this money.

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Equity Release Vs State Pension – Which One is Better For People Who Want to Purchase a Second Home?

Without a doubt, equity release is the best option for anyone who wants to purchase a second home. It provides you with enough funds to cover the cost of a second property without involving the stress of having to repay the money.

There are also specific lifetime mortgages geared towards people who want to purchase a second home, so there is plenty of advice out there on how you can do this.

You could either take out a second home plan with the promise of living in this home for half of the year, or a buy to let plan, which would allow you to rent out a property to tenants.

It could be possible for you to purchase a second home with your State Pension.

However, most people will not have enough money to do this unless they saved up their pension, which would take a lot of time and may not be possible if they need the income on a weekly basis.

You could consider purchasing a second home with your pension if you also have a private pension.

This would be a great way to achieve your goals without having to borrow money from anyone, which would mean that your family would be able to inherit more of your funds when you pass away.

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Equity Release Vs State Pension – How Much Could I Release?

If you are entitled to the full new State Pension, you will receive £181.15 per week (10). However, this is the maximum amount you will get, which means that many people receive less than this for reasons such as taking breaks from work.

It is not possible to increase this amount of money without delaying your State Pension. Some people choose to do this as a way of increasing their income in later life, but they would need to have enough funds to cover their earlier retirement years if they chose to do this.

Conversely, you can access much more money through the equity release scheme. With a lifetime mortgage, you could release up to 27% of your property at the age of 55, and up to 58% at the age of 82.

This value is capped at 58%, but this is still significantly more than you would get through a State Pension, of course depending on the value of your property.

With regards to a home reversion scheme, this form of equity release could see you receiving 30-60% of the market value of your home. Again, this could be a life changing amount.

It is also possible for you to release more money on particular equity release plans. For example, the enhanced lifetime mortgage is designed for people who are in their later years or who have a disability. They may be offered a higher loan amount if they are eligible.

If you choose to take out equity, you can either opt for a lump sum or for regular payments. This means the scheme will work for you no matter what you want to spend your money on. Most people release equity to pay off debts, but you may also use it for home improvements, gifting money, purchasing a car, or anything else that would positively impact your retirement.

Just as you can use a calculator to figure out how much State Pension you could receive, we have an equity release calculator that tells you how much money you could release from your property. This amount is dependent on the value of your property, the type of property you owned, and your age.

People with high value properties who are older than the average equity release customer will benefit the most from this scheme as their loan will be higher.

However, even someone with a relatively low loan may find that they are much more financially stable than they would be if they relied on their State Pension.

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How Does Equity Release Affect My State Pension – Find Out More

We hope that you now understand the relationship between equity release and the State Pension, and that you are more aware of the pros and cons of each option as a source of retirement income.

Please don’t forget that it is possible for you to pursue both options. You could do this by claiming the State Pension until you feel as though it is not enough to carry you through retirement, and then taking out equity and benefiting from the bonuses that come with doing races in older age.

Another option is to take out equity in the near future, before you are eligible to receive your State Pension. However, if you did this, you would not be able to put your equity release money into savings, otherwise your State Pension may be taken away.

If you are wondering how much longer you should work before you take out equity, please get in touch with us and we will offer our advice.

Generally, we recommend working until the age of retirement. This is because you would be able to enrol on an interest-only plan and start contributing some of your wage towards monthly interest payments.

The reason this is recommended is that the interest rolls up on equity release schemes, but if you repay it regularly, you will not be in as much debt as you would be if you allowed the amount to accrue.

However, are no longer able to work or you do not see yourself working in the near future, you can lean back on equity release, knowing that the money would not have to be repaid while you are alive.

If you finish work early, it may be better to request monthly payments so that you have a consistent income in retirement, rather than taking out a tax-free lump sum and potentially running out of money later down the line.

We know that we are in a very challenging time when it comes to managing money.

Poverty in later life is something that should not be overlooked, so it is very important that you consider how you are going to manage retirement during the cost-of-living crisis.

Please have a look at our blog where we offer tips on how to budget better, including finding three days out, cancelling unused subscriptions, and checking your eligibility for certain financial aid schemes.

If you are struggling to make ends meet each month, you will probably have to do something more drastic than simply budget better.

This is where equity release could come in. It does not require you to have plenty of savings or a high income, so your previous financial struggles will not count against you in most cases.

To find out more about how you could use equity release to fund your retirement in addition to or instead of a State Pension, give us your details here and we will be in touch promptly. You can also call us on 0330 058 1579 and ask us about a free consultation with one of our equity release experts.

Please call our 24-Hour Helpline: 0330 058 1579


[1] Check your State Pension age

[2] Voluntary National Insurance

[3] The basic State Pension

[4] The new State Pension

[5] Transgender people: equal treatment for State Pension

[6] Pension Credit

[7] Equity release can boost average pension pot by 181%, study suggests

[8] What is the tax position when I take money from my pension flexibly?

[9] Changes to the State Pension age

[10] How does the State Pension work and how much might you get?

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More about equity release

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Types of Equity Release Plans

There are two kinds of equity release plan, and these are lifetime mortgages and home reversion.

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Equity Release Calculator

Use the equity release calculator below to discover how much money you could release from your home.

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